Galbraith's Criticism of Keynes: Keep, Cut, or Edit?

Daniel Kuehn, in the comments on my recent post on Galbraith's criticism of Keynes, and in his own blog post, has pointed out that Keynes did not commit the error that Galbraith accused him of. To refresh your memory, Galbraith accused Keynes of assuming that full employment is "a flat ceiling which is approached uniformly by all sectors of the economy--they have assumed that the production functions for different industries are similarly shaped and, at any time, the rate of utilization is uniform." I found Daniel's point convincing.

You can read his whole post, but here are two key paragraphs from Keynes' General Theory that Daniel quotes:

Let us return to the employment function. We have assumed in the foregoing that to every level of aggregate effective demand there corresponds a unique distribution of effective demand between the products of each individual industry. Now, as aggregate expenditure changes, the corresponding expenditure on the products of an individual industry will not, in general, change in the same proportion; -- partly because individuals will not, as their incomes rise, increase the amount of the products of each separate industry, which they purchase, in the same proportion, and partly because the prices of different commodities will respond in different degrees to increases in expenditure upon them.

It follows from this that the assumption upon which we have worked hitherto, that changes in employment depend solely on changes in aggregate effective demand (in terms of wage-units), is no better than a first approximation, if we admit that there is more than one way in which an increase of income can be spent. For the way in which we suppose the increase in aggregate demand to be distributed between different commodities may considerably influence the volume of employment. If, for example, the increased demand is largely directed towards products which have a high elasticity of employment, the aggregate increase in employment will be greater than if it is largely directed towards products which have a low elasticity of employment.

Daniel concludes, "I can't help but thinking that it was awfully good for Galbraith's reputation that it was cut."

But there was one other option besides keep or cut, an option that any editor worth his salt knows: edit.

Daniel has persuaded me that Galbraith could not glibly make the accusation he did without evidence from other things that Keynes said or wrote. But could that accusation have been made against many of the Keynesians of the day? I think so.

@Kevin Donoghue,
Remember that Daniel's quote was from Keynes. So had I been Galbraith and wanted to salvage the point, I would have looked to Joan Robinson, Roy Harrod, John Hicks, Alvin Hansen, and probably a few others.
But, yes, your substitute language is quite weak.

Is it not the case that due to taxes, regulations and welfare that Employers and Employees each have their own supply & demand curve? What matters to Employers is marginal costs of production. What matters to Employees is marginal income benefits.

Government efforts to goose aggregate demand by increasing income subsidies certainly work to maintain a certain level of consumption. But these income subsidies decrease the incentive of the unemployed to work at the wages businesses want to pay. Rather than pay more per hour to hire extra staff businesses invest in technology to increase the productivity of the workers they have. Consequently, full employment remains elusive.

During the great recession the market valuation of leading technology providers have fared quite well. Likewise the market valuation of leading retailers and restaurants have fared quite well. All the while low-skilled workers have struggled to find decent employment.

Keynes's error is that his theory assumed the economy was a linear equation that could be solved with smart methods applied by smart bureaucrats. Hayek saw this flaw and so did Schumpeter. The economy is not linear and no one knows the right inputs. This includes the question of labor input. While long-term unemployment is unattractive short-term unemployment may be a natural consequence of a dynamic economy. That Bernanke talks about using the unemployment rate to guide his monetary policy ought to make one wonder who's fooling whom?

Just for the record, the section that Daniel Kuehn quotes is from Book V of The General Theory. To be more precise, he is quoting from Page 286, which is a page in 'Chapter 20: The Employment Function'. If anyone would like to learn more about the microeconomic foundations and supply-side of The General Theory, please take the time to look at the following pieces of scholarship that were published in Australia's History of Economics Review in 1994, 1995, and 1996.

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